As I watch the annual display of executive greed playing out on the field of diminishing shareholder returns, I am occasionally surprised to see a company or two looking at tying executive pay to important measures.
Last week, that surprise arrived in the form of an article in the Financial Times (February 24, 2010) in which several Dutch companies were noted for linking pay to stakeholder issues: environmental sustainability, worker and customer satisfaction, reduction in greenhouse gas emissions and the creation of more eco-friendly products.
DSM, the Dutch life sciences company is doing just that. It’s CEO, Feike Sijbesma noted that sustainability is the “key driver” of its business strategy. Another Dutch company, TNT, which is in the business of contract mail delivery, announced similar performance-based compensation arrangements.
What is interesting from an American shareholder perspective is the notion that directors consult with company investors when considering compensation for company executives. DSM’s supervisory board reportedly consulted widely with shareholders prior to developing the plan.
In contrast, investors in U.S. companies are often presented with indecipherable compensation plans, which in theory are performance-based but in practice are anything but. These bonus and stock option plans are developed by compensation consultants and rubber stamped by boards and their compensation committees. While considerable effort is put into these sophisticated pay algorithms, shareholders are rarely, if ever, given any say in the outcomes of these exercises. Add to that the pay-for-performance measures, which are often tied to short term measures of corporate earnings, return on investments or some other financial metric. This results in rewards that are inversely related to long-term performance and have no relationship to other measures as noted above.
For investors in U.S. companies, consider the following exercise for evaluating an executive compensation plan: Find any performance measure not related to short-term stock performance or find an example of pay linked to customer satisfaction. I suspect this will be a “Where’s Waldo” experience but with Waldo having left the scene some time ago.
I am interested in hearing your comments.
